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Advice for banks

Reuters
Tuesday, December 05, 2017

LONDON - Major central banks must ensure their efforts to gradually lift interest rates prove effective enough to cool some already "frothy" financial markets, the Bank for International Settlements (BIS) said in its latest report.

The umbrella organisation for the world's central banks gave the warning as investors continue to bask in what it called the "light and warmth" of improving global growth, subdued inflation and soaring stock markets.

Record high debt levels, however, highlight vulnerabilities in the financial system and the scale of this year's rally in asset prices seems to have increased caution at the Switzerland-based BIS.

"High debt levels, in both domestic and foreign currency, are still there. And so are frothy (asset price) valuations," the head of BIS's monetary and economic department, Claudio Borio, said.

"The longer the risk-taking continues, the higher the underlying balance sheet exposures may become. Short-run calm comes at the expense of possible long-run turbulence."

There was some surprise too that benchmark bond yields — which drive global borrowing costs — have stayed down even with the Federal Reserve now shrinking its balance sheet and the European Central Bank also about to heavily cut its stimulus.

The improving global growth outlook, Japan's ongoing money printing and the message from both the Fed and ECB that they will tread carefully going forward was the likely explanation for still low yields, though they did raise a "deeper question".

"Can a tightening be considered effective if financial conditions unambiguously ease? And, if the answer is no, what should central banks do?" Mr Borio said.

The pace of tightening from the likes of the Fed is already expected to be the slowest on record.








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